Grexit, the eurocrisis and the Modest Proposal into focus

By Petar Pismestrovic. Image source: The Greek Crisis

Readers of my blog know the following things concerning my view on Greece and the eurocrisis:

1. The crisis in Greece is not cyclical. It is not about relative prices but about absolute productive capacities.
2. Focusing only on Greece is false, since the crisis is deeply rooted in the ill design of the eurozone. The eurocrisis has local particularities, which however need to be seen as facets of the same systemic crisis, not as isolated, perfectly separable national crises.
3. The Greek state needs to run primary surpluses otherwise even the idea of exiting the euro is pernicious, since all funding for essential state expenses will be cut and the banking system will be excluded from crucially important ECB-Eurosystem liquidity (through the TARGET2 payment system)
4. Inflationary policies are disastrous. The arguments which effectively support inflationary policies, i.e. currency depreciation, fail to grasp the redistributive effect of inflation from the lower parts of the income distribution to the upper ones. Moreover the alleged virtues of inflation are overstated, while their advocates only look into the benefits of such policies, without considering the following: (i) erosion of real savings, (ii) distortion of prices and the price system, (iii) strengthening of cronyism since the inflationary money always enters first into the powerful and then to the rest, (iv) large scale malinvestments, either because frivolous spending is rewarded over long-term investments, or because more money channels cheap credit into areas that would normally not attract productive, sustainable investments, (v) perverse incentives are given to politicians to avoid necessary structural reforms, thus preserving the underlying malignancies.

As such I find the latest article of Vuk Vukovic on the fallacious comparisons between the case of Argentina and that of Greece as an oasis in the mass of antitheses we come across these last months over the "unavoidable, necessary and beneficial" exit of Greece from the euro.

I may only add to his article that domestic Argentine inflation is running rampant, according to non-official sources collected by The Economist. Allow me however to say that even a 10% official inflation is a major issue, which will have a very negative impact on the medium-to-long run (not excluding of course its current chilling effects).

But let us not speak of the Argentinian economy now. My point is that Vuk Vukovic has put forward a trenchant set of arguments against the comparisons between Greece and Argentina. I also agree his view on the role of institutions, which is a key aspect of the broader debate. Alas many economists dismiss it with slight contempt and smugness. Institutions are of crucial importance to the operations of any economy, thus any apolitical (non-political) argument is inherently flawed and one-sided.

The Modest Proposal: By Yanis Varoufakis and Stuart Holland

The other issue I would like to raise is that Varoufakis and Holland have released version 3.0 of their Modest Proposal for overcoming the eurocrisis. I find their proposal a very rational and determined response to the ongoing crisis. I shall not describe in detail what they propose, I may only point out their underlying principles which I find perfectly correct and for which I have repeatedly stood for.

Varoufakis and Holland differ from the rest because they believe in the following principles:

1. They are not trapped in the superficial and counter-productive controversy of austerity vs growth (the kind of empty rhetoric propounded by Mr François Hollande for example). Instead of "tax and spend", they adhere to the view of "borrow to invest" (in productive activities). Their view is far superior to the uneconomic pontifications we often listen to in political debates.
2. They do not advocate for inflationary policies. No money printing, no ECB as lender of last resort, no inane LTROs etc. Instead they argue that "lax monetary policy on behalf of the ECB, or greater wage/price inflation in Germany and the rest of the surplus nations is unlikely to deal with the crisis effectively".
3. They do not favor tax hikes, the policy regime par excellence of the troika and all those who fall in line with either "austerity" or "growth".
4. They correctly avoid another fallacious debate of our days: that of "creating jobs". In fact their policies are in line with what I have been saying lately that the EU needs to create value, not jobs.
5. They stress the importance of institutions and the need to move away from the current approach which is (i) gradualist, (ii) inconsistent, (iii) established on a non-holistic, case-by-case basis.
6. They correctly point out the importance of decentralization. Here I, a federalist, may add that Federalism is about decentralization and not about giving all powers to the centralized EU institutions.

Having pointed out these issues I urge you to read both the article of Vuk Vukovic and the Modest Proposal of Varoufakis and Holland. The eurocrisis will be dealt with effectively when we demolish the tissues of fallacies and deep misunderstandings upon which current European politics are established.

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